There was always the notion that, going into a bear market (not necessarily to say America will ever again experience one), it’s nice to own stocks that pay high, secure dividends — the dividend cushions the fall. Two reasons:
- Partly it does so simply by virtue of that quarterly check you get. A stock that drops 6% but pays a 6% dividend has, after a fashion, and after a year, broken even.
- More important, cushion-wise: for such a stock to drop by half, say, the dividend, if secure, would come to represent a 12% yield. Most of the time, stocks don’t pay dividends like that. Ergo, the stock will not drop by half — as without the dividend it otherwise might. The high dividend serves as a cushion.
Anyway, that’s always been the notion, and people seem to remember it. But in today’s environment, I’m sorry, I can’t help it — it makes me laugh.
Here is Dr. Stephen Leeb, in one of his newsletters, recommending Fannie Mae. “During rough markets,” he writes in part, “the company’s market beating dividend yield of 2.3% should support prices.”
Hello? Fannie Mae is a fine outfit, and its stock may be a buy under 41, as Leeb recommends. I don’t know. But the two things that jumped out at me were, first, that 2.3% is “market-beating” . . . and second, the notion that nervous investors would take comfort in that fat yield. The stock could fall by half, which would double the dividend as a percentage of the stock price, and still be yielding considerably less than Treasury bonds, real estate investment trusts (REITs) and utilities — less, indeed, than even tax-free municipal bonds.
So this isn’t a comment on Fannie Mae. But it may be a comment on what today passes for a market-beating dividend, and what that says about the market as a whole.
(In the very old days, stocks were expected to yield more than bonds, to compensate for the extra risk. I’m not sure that made a whole lot of sense, and it probably makes even less now. But it’s an interesting bit of history.)
Quote of the Day
Doctors bury their mistakes. Brokers just take a second commission.~Unknown
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